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Modernizing with Trackers

Time-tested cost recovery mechanisms provide stable funding for infrastructure replacement.

Fortnightly Magazine - February 2014
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When a utility installs a major rate-base project, such as a generating plant, which will be used and useful starting at a certain point in time, the traditional rate case model can appropriately accommodate the project’s cost recovery aspects. When a utility implements an ongoing infrastructure replacement program, the traditional rate case model can be supplemented by a tracker surcharge that can provide more timely cost recovery, subject to provisions for rate caps, periodic reconciliations, and eventual transition into base rates. 

For ongoing system improvement programs, the steady metronomic pace of a tracker can advance the public interest without the episodic spurts inherent in rate case filings. 

From Water to Energy

Pennsylvania is credited with adopting the first systematic tracker surcharge circa 1996, called a distribution system improvement charge. The DSIC was applicable to water companies seeking to modernize their distribution systems. The theory was to provide a timely return on investments that were being infused in a steady and ongoing manner, without incurring regulatory lag by waiting to lump together a cumulative series of investments for episodic rate case filings. The desired benefits included: gradual rate increases to match the capital expenditures that were actually being made in the field; a reduced number of rate cases; accelerated investment in aging infrastructure; and improved service by minimizing main breaks and discolored water complaints. This cost recovery mechanism was directed at pipeline replacement programs and didn’t apply to new main extension projects that would partially pay for themselves via revenue production or perhaps expense reduction. 

Other states also adopted automatic adjustment clauses for water distribution systems. According to the National Association of Water Companies, California, Connecticut, Delaware, Illinois, Indiana, Missouri, New Hampshire, New York, North Carolina, and Ohio adopted an infrastructure charge applicable to water systems and in certain cases wastewater systems. 

Since then, utilities have sought to use tracker mechanisms for gas and electricity investments. In 2012, Pennsylvania extended the tracker surcharge to electric and gas distribution systems. Eligible companies have subsequently filed their long-term infrastructure improvement plans, followed by their DSIC tariffs, to achieve the stated purpose of timely recovery of the reasonable and prudent costs incurred to repair, improve, or replace eligible property in order to ensure and maintain adequate, efficient, safe, reliable, and reasonable service.

Meanwhile, even in states that didn’t have a tracker surcharge for electric and gas utilities, power companies faced the need to harden their infrastructure to deal with various storm events and episodes of extreme weather. 

In the District of Columbia, Mayor Vincent Gray formed a task force that evaluated methods to finance an initiative to bury the electric lines owned by PEPCO, and in May 2013 the task force recommended a tracker surcharge as one of the methods to provide for cost recovery. In

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